Four major strategies to win the “new profit” era

  In the past few decades, corporate profits have always shown amazing resilience.
  Since 1990, the GDP of developed countries and regions has shown a steady growth, with an average annual growth rate of 3.6% (calculated in nominal prices), while the growth rate of corporate net income has nearly doubled over the same period, reaching 7% per year. Despite large-scale economic events such as the bursting of the Internet bubble in 2000 and the 2008 global financial crisis, corporate profits in developed markets have achieved historic growth.
  In addition, terrorism, the refugee crisis, Brexit, and long-term geopolitical turmoil cannot prevent the profitability of companies from ushering in a “golden age”. Will the “golden age” continue? Will the key factors that once pushed corporate profitability into the “golden age” still work in the future?
  Bain found that, in fact, before the outbreak of the new crown pneumonia epidemic, corporate profits had already shown signs of peaking. We believe that the epidemic will become a booster for this trend. Similar to other historical crises that have been experienced before, the wave of change that originally took ten years or more for companies to brew will accelerate due to the outbreak of the epidemic.
Profit pressures sweeping the world

  Bain conducted research on companies in developed markets, including 13,000 listed companies in 26 developed economies including the United States, Europe, Asia, Canada, Australia and New Zealand. The study found that although in the past 20 years, the share of developing countries (especially China) has achieved significant growth due to the rapid increase in corporate profits, but it is undeniable that developed economies still dominate overall profits , Mainly due to six waves of change.
  *Labor bargaining power is gradually weakening: The labor union is declining and the labor supply is increasing.
  *Financial Liberalization: Improved the profitability and economic scale of financial services.
  *Globalization: Help companies reduce supply chain costs and enter emerging export markets.
  *Commodity “super cycle”: Benefited from the rapid industrialization of China and India.
  *The rise of large Internet platforms (especially in the United States): With network effects and asset-light model expansion, it has helped a small number of companies achieve extraordinary profitability.
  *Automation: As the industry continues to expand, it promotes the transfer of labor and capital.
  At the same time, the sharp drop in the cost of capital has also contributed to a significant increase in corporate economic profits.
  But it is worth noting that although the average profit margin of a company has maintained steady growth, the median profit margin has actually begun to decline. At present, the United States is still the largest contributor to total global profits, and other advanced economies are also facing varying degrees of pressure on profits.
  1. The European developed economies
  to a large extent, European corporate profits related to the development path with the EU as a whole commitment and risk.
  At the beginning of the 21st century, after the implementation of the unified monetary policy, capital began to pour into peripheral countries, especially Portugal, Ireland, Italy, Greece and Spain, and the rate of corporate return soared rapidly. The financial crisis and the sovereign debt crisis that followed have plunged the European economy into trouble, making it difficult to regain a foothold, which in turn led to a decline in corporate profits.
  A series of stronger labor protection mechanisms and wider welfare coverage than the United States have restrained the increase in inequality. However, Europe is increasingly unable to build international competitiveness (especially in peripheral countries), and its large technology companies and Internet platforms The degree of scale is far behind the United States and China.
  These weaknesses both hindered the development of profitability and inhibited the growth of real income, leading to the rise of populism. The epidemic crisis has amplified these risks. If reforms are not carried out, the profit level of European companies will face tremendous pressure in the coming decades.
  2. Asia’s developed economies,
  corporate earnings model in Japan and the Asian tigers significantly different. The weak macro economy after the 1990 financial crisis dragged down the profitability and growth momentum of Japanese companies, causing this former economic power to miss the “golden age” of Western corporate profit development.
  In contrast, the Asian Tigers not only maintained rapid growth, but also achieved (relatively) stable returns. While creating huge value for shareholders, people’s living standards have generally improved. For these economies, the main problem is that international trade accounts for too much of the GDP and the dependence is too high. Being in a deglobalized world, this may expose them to huge risks. At the same time, the economic growth of these countries has begun to slow down.
  3. Australia, New Zealand and Canadian
  corporate profits in the three countries mainly in the resources industry, and in recent decades to keep up the global commodity prices. At the beginning of the 21st century, driven by the “super cycle” of commodities, corporate profitability has been greatly improved, but with the evolution of the cycle, it has fallen back to historical levels.
  In addition, the demand from the resource industry drives up unit labor costs, weakening the competitiveness of these markets in other tradable sectors. As the recent “super cycle” fades further, the recovery of corporate profitability will become more challenging.
Triple factors lead to peak corporate profits

  Recently, Bain and Oxford Economics (Oxford Economics) conducted a study and concluded a number of key factors that will inhibit profit growth in the next few years-these factors include both market dynamics, government and social possibilities The boycott.
  Factor 1: The market itself. Favorable market trends often fluctuate, and as we enter the next brand-new decade, the wave of globalization begins to enter a period of recession. The trade war in recent years has prompted companies to rethink their dependence on offshore supply chains. The epidemic has further exposed the real risks faced by these elongated low-cost supply chains-if companies adjust supply in order to optimize risk management The chain layout may put a certain pressure on profit margins.
  Factor 2: The changes in the labor market will put upward pressure on the costs of many companies.
  In the past few decades, the “baby boom” generation has entered the old age, more women have entered the labor market, and the rise of offshore outsourcing. The above three trends have ensured a stable supply of labor while inhibiting wage growth. However, in recent years, these trends have either fully emerged or have been completely reversed.
  In many economic fields, it will be increasingly difficult to find talents with appropriate skills and perfect matching positions, although the unemployment wave brought about by the epidemic will inhibit the evolution of this trend in the short term.
  In addition, the impact of the epidemic may cause a devastating blow to medium-sized companies with excessive leverage. On the bright side, the acceleration of automation and the continuous expansion of Internet platforms provide support for companies to maintain high profit margins. However, these benefits mainly flow to the largest and fastest-growing companies. Other companies may be limited by their own scale and struggle: some companies may be acquired or disappear, while others will grow stronger. The ranks of “zombie companies” are those companies that have exposed their bad debts because the banks are unwilling to fail the company, and therefore rely on loans for blood transfusion for a long time and barely survive.

  Factor three: the expansion of state functions. On the whole, perhaps the above two factors are not enough to slow down the rapid growth of corporate profits. In the long run, when companies gradually emerge from the haze of the epidemic, there is an uncertainty factor that will significantly affect the rate of return.
  Since the industrial revolution, in terms of the relationship between enterprises and society, the degree of freedom of enterprises has experienced an infinite cycle of rising and falling. In retrospect, the substantial increase in corporate profitability, although only in large companies, was accompanied by some worrying social indicators. For example, the widening income gap (before and after taxes and transfer payments) and the stagnation of upward social mobility have further exacerbated people’s dissatisfaction with the status quo.
  Long before the outbreak of the epidemic, society’s requirements for companies have begun to continuously increase, requiring companies to look far beyond the pursuit of short-term shareholder wealth maximization and set more ambitious corporate goals. In the face of the epidemic crisis, the functions of the state have rapidly expanded. The government actively intervenes in the operation of the market and intervenes as the last investor.
  The new crown pneumonia epidemic crisis and the previous global financial crisis have clearly demonstrated that the current economic vulnerability is increasing. On the one hand, small companies are struggling to maintain profit levels (and take more financial risks). On the other hand, large companies that are interconnected and “cannot be closed because they are too large” are increasingly dependent on the government.
  Looking to the future, when the whole society is striving to cope with a series of challenges such as global warming, data regulation, and automation to replace humans, the increase in government intervention may evolve into a “new normal”. Regulation, taxation and other interventions may have a huge impact on corporate profitability.
Four major strategies to win the “new profit” era

  Throughout history, crises are often catalysts for change. Bain believes that the epidemic is no exception, and this crisis may accelerate the current trend. Therefore, it will be more difficult for multinational companies to continue the profit growth they have maintained over the past 40 years.
  In addition, the peak of profit coincides with the historical changes in the business era-from the previous era of “shareholder supremacy” to the era of large-scale “new forces”. In this regard, Bain suggested that the majority of business leaders should start from the following four perspectives to win the new business era.
  1. strengthen the competitive advantage
  although in recent decades favorable macro environment driving the overall profitability improved, but our research model shows that nearly 60% of the profitability of the enterprise level fluctuations is still attributed to the company itself or the industry-specific factors, namely business The profitability of the company is still mainly under the direct control of the corporate leader, and the leader’s strategic choice is crucial. As the profit pool shrinks, competition for customers has intensified. In order to survive better, companies need to take account of scale and customer intimacy, deploy and implement them simultaneously.
  2. Restart business innovation
  based profit increased competition environment, business leaders must regain the ability to innovate are ignored, thereby creating value. Once the government raises the threshold for mergers and acquisitions, in a low interest rate environment, the sensitivity of intrinsic value to growth far exceeds the sensitivity to profitability, which is particularly significant.
  3. To enhance the toughness
  in order to offset pressure on margins, many companies tend to sacrifice a certain toughness in exchange for greater efficiency. In a turbulent environment full of uncertainty, this approach will eventually prove to be unwise. In this regard, Bain suggested that, in addition to paying attention to the current year’s earnings, companies should also consider the impact of current strategic, operational and financial choices throughout the business cycle. To do this well, you must have a frank dialogue with investors. In the previous two business cycles, investors did not bear all the costs caused by insufficient corporate resilience.
  4. Raise awareness of sustainable development
  Just like the recent wave of social justice, the calls for companies to take on more civic responsibilities will increase in the coming years. In the face of increasingly complex and intertwined social expectations, Bain found that calm response and adaptability are not only regarded as an inevitable moral requirement, but also an important source for companies to gain competitive advantage.
  The new era will require leaders to proactively identify and effectively solve the problems that employees and customers care about-otherwise they will face the risk of “lose-lose” for employees and customers.
  The above countermeasures pose challenges to the leadership team and need to break the inherent mindset in the next few years. Although the specific development of many factors that affect corporate profitability in the future is still unknown, the scale and speed of transformation that companies are facing now force leaders to take bold actions; those who are not enterprising will never be gentle in the new era Wait.
  The writer of this article is a senior global partner of Bain & Company.